Investment portfolios should include some level of alternatives investments to provide exposure to uncorrelated asset classes, according to David Kelly, chief market strategist at JPMorgan Asset Management. “This is not a time to retreat to cash,” he advised financial advisors and portfolio managers during an address at the Alternatives Mutual Fund Forum in Boston on Monday.
There is only a 25% chance the U.S. economy will enter a recession, and if it does, it will be driven by fear rather than fundamentals, he asserted. The current state of affairs has created an environment of extremes where finding balance in investment portfolios through diversification is vital for long-term performance, Kelly said. Alternatives strategies are an effective diversification tool, he noted.
Poor management on the part of U.S. and European policymakers has created a chronic economic environment, but not a crisis, he asserted. “The doctor is infinitely more dangerous than the disease,” Kelly quipped, referring to policymakers and the economy, respectively. The Federal Reserve should warn that it plans to raise interest rates, rather than guarantee that it will not through 2013, so consumers see an urgency in locking in low rates right now, he argued. European regulators should deal with the sovereign debt crisis by bailing Greece out with a stimulus package that helps its economy grow, he said.
Kelly cited strong corporate profits and consumer balance sheets and moderate inflation among the indicators that the U.S. economy should not enter a recession. Corporate profits as a percentage of gross domestic product were historically high at 10% in the first quarter—high unemployment has helped put a lid on wage increases, he explained. The 11.1% household debt service ratio in the first quarter is close to a 30-year low of 11.2% in 1980, he added. The ratio peaked at 14% in 2007. The 2% core inflation is lower than the 50-year average of 4.1, he added.
Kelly’s widely followed quarterly guide to world markets—a 60-page tome that is part of JPMorgan’s Market Insights advisor education program—will be released Oct. 3.